CORPORATIONS Flashcards
What is required to form a de jure corporation?
Revised Model Business Corporate Act (RMBCA)
1) Articles of Corporation
- Corporation’s name
- Shares (authorized for issuance)
- Agent’s name + address
- Incorporators’ name + address
- Other provisions consistent w/ RMBCA
2) Lawful business purpose
- Related activities
3) Organizational meeting
- Directors’ election (by SHs)
- Officers’ appointment
- Adoption of bylaws (by Ds)
4) Incorporators must file Articles with Secretary of State
- Corporation then exists
Can a corporation be formed if the business purpose is not lawful (ultra vires)?
Common law (no) - Void
RMBCA (yes)
- Enjoin purpose
- SH/State sues Corporation
- Corporation sues D/Employee
What is the difference between Articles of Incorporation and Bylaws?
Articles
- Deals with formation of Corporation
Bylaws
- Deals with daily management of Corporation
Which takes precedence between conflicting Articles of Incorporation and Bylaws?
Articles
How can members avoid liability to third parties for actions before Corporation was incorporated?
De Facto Corporation (common law)
1) Existing statute (Corporation could have been formed under)
2) Liable SH made good faith attempt to comply
3) Business conducted under Corporation’s name/corporate privilege
- Contract + Tort victims
Corporation by estoppel (case-by-case)
- TP dealt with corporation as if Corporation existed
- TP estopped from denying Corporation’s existence
- Contract victims
How can members be liable to third parties for actions before Corporation was incorporated?
Member knew corporation did not exist at the time of transaction => Jointly + severally liable with Corporation
What is required for modifying/repealing bylaws?
Majority vote of SHs/Ds
Promoter
A person who takes actions to set up a new business before an entity formally comes into existence
What fiduciary duties do promoter owe Corporation?
Loyalty (Fair disclosure)
1) Disclose all material facts
2) Approved by independent Board
3) NO fraud misrep/failure to disclose
Care (good faith)
Is a promoter liable to TPs?
Before + After incorporation (joint + several liability with Corporation) (RMBCA)
How can promoters avoid liability to TPs?
Novation (express/implied)
- The substitution of a new company for the promoter by assent of all affected parties. Can relieve a promoter of liability for a contract
- Agreement between Promoter + Corporation + TP
Is a corporation liable to TPs?
Express adoption (by directors) - Knowledge of material facts
Implied adoption (by employees) - Knowledge of material facts + Acceptance of benefits
Can employees subscribe to Corporation’s shares?
RMBCA
- Long period of stock subscription (at least 6 months)
- NO broker commission fee
How can stock subscriptions be revoked?
Subscription grant provides revocation
Unanimous vote by subscribers to revocation
Board of Directors
The group of persons tasked with setting the overall strategic vision for the corporation and possessing the power to hire and fire the officers that manage the corporation
Officers
Agents of the corporation identified in the bylaws (such as the president, secretary, treasurer, and CEO) who enable the corporation to interact with the rest of the world
How can directors approve decisions without board meetings?
1) Unanimous vote (Directors)
2) In writing
How can directors approve decisions with board meetings?
1) Meeting
- Regular
- Special (2 days’ notice re date + time + place of meeting to ALL directors/Notice to Director by alternative method + Director votes at meeting)
2) Quorum
- Majority of Ds attend meeting/attend by alternative method and able to hear each other + Majority of attending Ds approve
How can directors lose approval of decisions?
Director objects to meeting
Director leaves meeting (breaks quorum)
Duty of Care
The fiduciary obligation that requires directors and officers to utilize a reasonable decision-making process when taking actions on the part of the corporation
Duty of Loyalty
The fiduciary obligation that requires a fiduciary to subordinate the fiduciary’s own interests to those of the corporation and to act in a manner that the fiduciary reasonably believes to be in the corporation’s best interests
How can a director comply with duty of care?
(Burden of proof => Plaintiff)
Business judgment rule (show intentional basis for Ds’ decisions - very deferential standard to directors)
1) Discharge in good faith
2) Ordinary prudent person in same position would do
3) Act was reasonably believed to be in Corporation’s best interests
Good faith reliance
1) Opinions/Reports/Statements
2) Officers/Employees/Directors’ committee/Lawyers/Accountants
3) Reasonably believed to be competent by Director
4) NOT related to Director
How can a director comply with duty of disclosure?
Disclose material corporation info to directors
Self-dealing Transaction
A conflicting-interest transaction between a director or officer and the corporation where the director or officer had knowledge and a direct or indirect material financial interest
How can a director be liable for breaching his duty of loyalty by conflicting interests?
1) Director/Related person
2) Engages with someone who will be reasonably expected to influence Director’s judgment/Receive beneficial financial interest
3) Director knows of this
4) Director should have brought this to Board’s attention
How can a director comply with his duty of loyalty by conflicting interests (safe harbor)?
Burden of proof => Director
Disclosure of all material facts
1) Material facts (ordinary prudent person would consider important with processing transaction)
2) To disinterested Directors/Shareholders
3) Disinterested Directors/Shareholders consent by majority vote
Fair transaction
1) At the time
2) To Corporation
3) Adequate consideration/Corporate need/Financial position/Alternatives
What remedies are available against a director for conflicting interests?
Damages
Set aside transaction
Enjoin transaction
How can a director be liable for breaching his duty of loyalty by usurping corporate opportunities?
Burden of proof => Director
1) Not give Corporation an opportunity to act first
2) Opportunity has interest/expectancy (within Corporation’s line of business) (not Corporation’s lack of financial ability)
What remedies are available against a director for usurping corporate opportunities?
Accounting for profits
Force conveyance of opportunity for amount director paid (constructive trust theory)
How can a director be liable for breaching his duty of loyalty by competing ventures?
Burden of proof => Director
1) Engage with competitor
2) Derive benefit
What is the difference between directors, shareholders and officers?
Directors
- Make decisions on Corporation’s governance
Shareholders
- Vote for Directors through elections
Officers
- Make decisions on Corporation’s daily management
How can directors limit their liability?
Articles of Incorporation
Exculpatory provisions
- Not for non-entitled financial benefits
- Not for intentionally inflicted harms
- Not for unlawful distributions
- Not for intentional violation of criminal law
What duties do officers owe to the corporation?
Reasonable care
Good faith
Bylaws
How may Corporation be liable to TPs for officers’ acts?
Principal-Agency relationship
1) Actual/Apparent authority/Ratification/Adoption/Estoppel
2) Acts within scope of authority
What type of distributions can Directors make?
Dividends
- Payment to SHs
Redemption/Repurchase of shares
Distribution of assets upon liquidation
Who can declare distributions?
Directors (at their own discretion)
Majority SHs
- Protect minority SHs affected by improper distributions
Who is entitled to distributions?
Record SHs
- Same priority as unsecured creditors
How may distributions be limited?
Dividends
- By Articles
- Only majority votes entitled to issued shares may approve
By Articles
Solvent Corporation
- Corporation can pay debts due
- Assets exceed liabilities
What are directors liable for if they improperly declare distributions?
Amount exceeding proper distribution
How may directors limit liability for improper distributions?
NO oppression of minority SHs
Approved distributions in good faith
- Reasonably accurate financial statements
- Reliance on information from non-related officers/lawyers/accountants
Claim contributions from
- Directors who approved/liable for distributions
- SHs who knew of breach
How can shareholders vote for decisions without meetings?
1) Unanimous vote
2) In writing
How can shareholders vote for decisions with meetings?
1) Meeting
- Annual
- Special (Notice within 10-60 days re Date + Time + Place)
2) Record Shareholder
- Holds outstanding shares at record date (decided by directors 70 days before meeting/delivery of notice)
- 1 vote per share (unless articles state otherwise)
3) Quorum/Majority vote
How can shareholders delegate voting powers?
Proxy vote (11 months valid)
1) Writing
2) Signed
How can proxy votes be revoked?
1) Notice to secretary of Corporation
2) Proxy vote holder votes for revocation
How can proxy votes not be revoked?
1) Proxy stated as ‘irrevocable’
2) Proxy coupled with interest other than voting/security
How can directors be elected?
Directors are elected by the shareholders at the annual shareholders’ meeting and may be elected by straight or cumulative voting and by one or more classes of stock
How can shareholders remove directors?
With cause
Without cause
How can shareholders vote on amendment of articles?
Amendment affects specific SHs’ class of stock => Specific SHs can vote on amendment
- NO voting process required
How can Shareholders sue Directors?
Direct Suit (for SH)
- Injury separate and apart from any injury done to the corporation
- Breach of fiduciary duty to SH
Derivative Suit (for Corporation)
- Shareholder’s injury arises from an injury to the corporation
1) Stock ownership at time of suit/under bylaws
2) Adequate fair representation of Corporation’s interests
3) Written demand to Corporation (NOT futile bequest)
4) Suit commences after 90 days
What is Shareholder entitled to if he wins/loses derivative suits?
Win
- Corporation receives damages
- SH receives legal costs
Loss
- SH must pay legal costs to Defendant
How can derivative suits be dismissed/settled?
Not in corporation’s best interests
1) Majority vote of directors
2) Directors made reasonable inquiry (independent investigation) into the issue
3) Directors acted in good faith (legal costs exceed SHs’ recovery costs)
Court approval
How can controlling SH (Parent) be liable to Subsidiary for breach of duties?
Care
Loyalty
What is the difference between voting trusts and voting agreements?
Voting Trust
- A voting arrangement in which one or more shareholders agree to transfer their shares to a trustee, who is assigned the power to vote the shares
Voting Agreement:
- Voting arrangement in which shareholders who own shares in the same corporation enter into contracts with one another regarding voting, typically to vote for certain individuals as corporate directors, and under which the shareholders vote their own shares
Piercing the Veil
Exception to the general rule that shields a company’s owners from personal liability for the company’s debts, thereby allowing a plaintiff to sue the company’s owners personally for the company’s debts
How may active SHs be jointly and severally liable with Corporation to TPs?
1) TP is tort victim/creditor
- NOT contract victims unless they had no chance to investigate under contract
2) Pierce the Veil
- Ignorance of corporate formalities (Alter Ego)
- Lacking capital at time of formation
- Fraud
- Avoiding current liabilities (NOT future)
- Self-dealing
- Commingling
How may active SHs be personally liable to TPs?
Negligence
Absence of De Facto Corporation
By SH agreement
Breach of care/loyalty (by SH/Parent)
Oppression of minority SHs
- Unfair prejudice
- Not disclose all material facts
- Pay no dividends (affecting ALL SHs in same way)
What are the advantages of using a voting trust?
Avoid share control in hostile takeover
Avoid conflict of interests
What are the different types of shares?
Authorized Shares
- Shares the Corporation is authorized to issue
Outstanding Shares
- Shares of stock authorized and issued by the Corporation that have not yet been reacquired, redeemed, converted, or canceled
- Voting rights
Reacquired Shares
- Issued shares reacquired by the Corporation through repurchase or redemption
- NO voting rights
Shareholder’s Preemptive Right
An option that a corporation may grant to shareholders, allowing them to buy shares in a future issue of common stock before the shares are offered for sale to the public
Types of Stock
Common Stock:
- A basic ownership interest that entitles the owner to vote on corporate governance matters
Preferred Stock:
- Carries special rights
- Has preference over other stock with regards to distributions
What is the difference between debt and equity?
Debt
- NO ownership by Corp
Equity
- Ownership by Corp
What type of debts are there?
Bonds
- Secured
Debenture
- NOT secured
What type of equity is there?
Sold
- Issued shares
- Outstanding shares
Reacquired (redemption/reacquired)
- Authorised shares
- NOT issued shares
How are value of shares determined?
By directors (as they deem appropriate) (RMBCA)
Par value (Articles) - Generally eliminated by RMBCA
What is required for consideration to pay equities?
1) At Directors’ request
2) NOT discriminatory
3) Tangible/Intangible
4) Beneficial to Corporation
What happens if SH fails to pay consideration for equities?
Liable for unpaid amount
What is required for shareholder to exercise their pre-emptive rights?
1) Authorised by Articles
2) Issued in cash
3) Issued at least 6 months after incorporation
4) SH has voting rights
=> SH can purchase at same % ownership in corporation
What is required to approve fundamental corporate changes?
1) Directors’ resolution
2) Written notice to SHs
3) SH’s resolution
4) Changes incorporated into Articles
5) Articles filed with Secretary of State
When is SHs’ resolution not required for mergers?
Merger (Corporation + Surviving Corporation) (NO Surviving SH’s resolution required)
1) Surviving Corp’s articles remain the same
2) Surviving SHs’ hold same shares + rights
3) Issued shares’ voting power is max. 20% of Surviving Corp’s voting power before merger
Merger (Parent + Subsidiary) (NO Subsidiary SH’s resolution required)
1) Parent owns +90% of outstanding shares
2) Parent mails merger plan to Subsidiary SHs
When is SHs’ resolution not required for share exchange?
Only acquired SHs’ consent required
What is required for asset lease/sale/exchange?
1) +75% assets involved
2) NOT in ordinary course of business
Seller
- Liable for own obligations
Buyer
- Liable
- Liable (disguised merger) (de facto theory)
What is required for amendment of Articles?
Amended provisions would be lawful in original Articles
Dissenting Shareholder’s Right of Appraisal
The right of shareholders to sell their shares to the corporation for a fair value when they do not consent to a merger or acquisition; also known as appraisal rights
What type of changes may SHs exercise their right of appraisal?
Not Amendment of articles
Which SHs may exercise their right of appraisal?
Merger (Corp-Corp)
- SHs entitled to vote
Merger (Parent-Sub)
- Subsidiary SHs
Asset sale/lease/exchange
- SHs entitled to vote
Voluntary Dissolution
The dissolution of a corporation by majority vote of the directors and the shareholders
What happens after voluntary dissolution?
1) Dissolution
2) Continue corporate existence
3) Carry on business (as appropriate during winding-up)
Administrative Dissolution
The dissolution of a corporation by the secretary of state
Judicial Dissolution
By Attorney General
- Corporation fraudulently obtained Articles
- Corporation abused its authority
By SHs
- Directors’ deadlock (SHs cannot break + irreparable injury to Corporation)
- Directors conducted fraud/illegal activity
- Directors misapplied assets
- SHs failed to elect Directors after at least 2 consecutive annual meetings + SHs’ deadlock
By Creditors
1) Insolvent Corporation
2) Unsatisfied judgment/Corporation admitted written notice re Creditors’ claim due
Quorum
The minimum number of shares that must be present at a shareholder meeting for any actions taken to be valid
Regular Voting
The shareholder voting method where a normal action is approved when the number of votes cast in favor of the action exceeds the number of votes opposing the action
Straight Voting
The shareholder voting method for electing directors where each seat on the board is treated as a separate election, so that a slim majority of votes may win the vote on each board seat
Cumulative Voting
The shareholder voting method for electing directors where a shareholder multiplies the number of shares the shareholder owns by the number of board seats being contested, and then allocates those votes among the candidates as the shareholder sees fit; candidates who receive the most votes are elected to the board
Proxy Voting
The shareholder voting method in which a shareholder can appoint someone to vote the shareholder’s shares at a shareholder meeting
Close Corporation
A corporation with just a few shareholders, typically a small business where all stock is owned by a single family
Share Transfer Restriction
A limitation on the ability of a corporation’s shareholders to sell their shares, which may be written into the articles of incorporation, the bylaws, or an agreement (either among the shareholders or between the shareholders and the corporation)
Right of First Refusal
A share transfer restriction requiring the shareholder to offer to sell his shares to the corporation (or another specified buyer) before selling them to anyone else
Member-Managed LLC
The owners typically operate the entity on a day-to-day basis.
Each member is empowered to bind the LLC to contracts for carrying on the ordinary business of the company
Dissociation
A member can dissociate from an LLC at any time; must provide notice
- Reliquishes the right to participate in the LLC
- Interests and liabilities are not discharged
- Member may not have rights to distribution unless agreed upon by continuing members
Liability of LLC Members
No member or manager becomes liable to an outside party on the debt, obligation, or liability solely by reason of acting as a member or manager
